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Press Conference by CPPCC representatives from CSRC and affiliated organizations was held on 8th March, 2013. Chen Dongzheng, representative of the CPPCC and Chairman of Shenzhen Stock Exchange held an in-depth dialogue with the press. His talk touched upon channeling private funds into the capital market and formation of consensus for healthy market development. He also answered questions regarding the ChiNext Market, bond market, OTC market and cooperation between the Mainland and Hong Kong.
Channeling Private Capital Supporting SMEs and Innovation
The very first proposal in the government work report is to accelerate the transformation of economic growth model and promote sustainable and healthy development. Expanding domestic demand is China's long-term economic development strategy, with domestic consumption as a foundation and investment as a key driver. In particular, the report proposed that the government plays a very important role in guiding private investment, which sees decreasing proportion in total social investment. Thus it’s necessary to further facilitate private investment and stimulate its vitality.
Last April, the State Council issued the annual 14th document titled Opinions on Further Support for Healthy Development of Small and Micro Enterprises. The document made it clear that 15 billion Yuan (USD 2.4 billion) special support funds from the central government budget would be allotted in the next five years. In line with the establishment of the multi-tiered capital market, China's venture capital has witnessed rapid development. So far, the total amount of funds managed by more than 4,000 venture capital institutions has reached 1.64 trillion RMB Yuan(USD 260 million), and they have completed 1503 investment projects in the single year of 2011 with funds totaling 79.5 billion Yuan (USD 12.8 billion). The number was far greater than the central government budget and the investment was concentrated on SMEs and high-tech enterprises.
SMEs represent future development of China's economy. Through the development of policies, we should actively guide private investment in the SME Board and the ChiNext Market. The multi-tiered capital market offers most effective channels for private investment. In spite of some necessary cost incurred, we have made remarkable achievements. In order to sustain the efforts, supporting policies should be formulated. As a practical measure to guide private investment, government policy should be geared to support venture capital. At the moment, the means and channels for private investment in China are still limited. The government should explore more reasonable and attractive investment channels for the huge social capital. Venture capital is an emerging business in China. Certain problems exist in the development process. It needs to be regulated and perfected. But it should be given a tolerant policy environment.
Seeking consensus and promoting innovation and development in the capital market with concerted efforts
The reform is a gradual process. It may proceed in a top-down or bottom-up approach. But the crux of the issue is to consensus building. The biggest problem facing the capital market is the pluralism of interests and consequential intertwined contradictions. The three-high (high price-earning ratio, high IPO price and high IPO proceeds) phenomenon of the ChiNext Market, especially overly-raised proceeds and executives’ share sell-off, is due to diverging interests and inconsistent market actions. However, all market participants share the "Chinese Dream", which is to build an innovation-driven country and a harmonious well-off society. The "Chinese Dream" provides a solid foundation to reach consensus despite the diversified demands of market participants and conflicting opinions at some stages of development.
The multi-tiered capital market system, comprising of section differentiation, product development, regulation and services, requires development through innovation. In all these endeavors, consensus building should be equally emphasized. Success of innovation does not come from satisfying demands for short-term and partial benefits, but from the ability to adapt to the complex and volatile macroeconomic environment. Thus we should carefully weigh the opportunities and risks and take into account the global and long-term factors. SZSE, as a front-line regulatory body, will fully appreciate changes in the market, build up experience in innovative efforts and reach consensus through explorative attempts. As a bottom line, SZSE will spare no effort in preventing systemic risks and the major or fatal risk events to secure innovative endeavors.
SME private placement bonds debuted last year. Though some progress was made, the overall performance fell short of expectations, reflecting immature market environment in China. With high risk and high return, the high-yield bond is usually a major part of investment portfolio for international institutional investors. However, in China, the institutional investors are still less mature than expected. From another perspective, it requires again consensus building to develop a mature market based on institutional investor community. As the market moves toward maturity, more professional institutions are needed to serve retail investors. Investment products become increasingly complex. In the Chinese market, with the stock index futures, and margin trading of securities, the shorting mechanism has appeared. The heated debate over T+0 implies that the mechanism favors institutional investors rather than retail investors. It is self-explanatory why institutions are the major participants in mature markets. It calls for general acceptance and agreement that an increasing number of mature and qualified institutions should replace retail investors as a major market community and bear risk for retail investors.
ChiNext Market is a good attempt to facilitate social transformation
It requires coordination among all relevant parties and participation by walks of society including media for development and improvement of the ChiNext Market. There are problems with the ChiNext market and they are the cost we must pay for growing up. But we should not underestimate important role the ChiNext Market plays in bolstering SMEs in China. Its significance is not confined to the capital markets. In fact it serves as a good attempt to facilitate social transformation. The ChiNext Market maximizes the entrepreneurial enthusiasm of various groups of the society, aggregates intellectual capital and financial resources in support of entrepreneurship and innovations. Social respect for entrepreneurship not only enhances social harmony and tolerance but also helps mobilize multitudes of social forces in the common cause of building an innovative country and a well-off society.
The ChiNext Market issuers are currently limited to six major sectors. With economic and technological development and deepening interconnection between sectors, we hope the restrictions can be lifted when conditions permit and social consensus is reached. The consensus usually results from fierce collisions. We hope that this process takes shorter durations and smaller cost than it would otherwise. In particular, the errors made before need not be repeated. Such a requirement poses a serious challenge for regulatory authorities, including SZSE.
Encouraging long-term holding of restricted shares through proper tax scheme
With the launch and smooth operation of SME Board and the ChiNext Market, the capital market has provided financial support for many SMEs, hit-tech and private companies and helped to bolster emerging industries of strategic importance. But in the process, the trading of restricted shares undermines the stability of corporate control and management, and consequently posing negative effects to the smooth operation and healthy development of capital markets. At the end of 2012, some restricted shareholders of the ChiNext Market volunteered to extend the lock-up periods. But in the long run, relevant policies and further guidance are needed to encourage long-term holding. In November 2012, the Ministry of Finance, State Administration of Taxation, and China Securities Regulatory Commission issued Notice on Implementation of Differentiated Personal Income Tax for Dividend of Listed Companies. Tax rate differentiation is conducive to attract private investment in entrepreneurial and innovative enterprises and has been widely adopted abroad. Taking into account the practical demand for the differentiated tax policy, we recommend further optimization of taxation policy to enhance its incentive functions.
Promoting Differentiated Development for Small and Medium-Sized Financial Institutions and Encourage Them to Support SMEs
The vast majority of small and micro enterprises fall short of for the criteria for public listing or trading in OTC markets, limiting their access to capital market services. Large state-owned commercial banks have willingness and ability to provide support, but they also face practical constraints. Small and medium-sized banks have irreplaceable advantages in serving small and micro enterprises when it comes to information acquisition and risk recognition. However statistics indicate that only three of a total of 144 municipal commercial banks and one of 337 rural commercial banks have gone public and gained advantage through public financing. In comparison, in the U.S., NASDAQ has listed more than 600 different kinds of financial institutions, accounting for one fifth of its total number of listed companies and 337 of them are regional small and medium-sized bank. Japan has 105 regional banks, among which 75 are listed in Tokyo Stock Exchange.
First, by encouraging a number of mature municipal commercial banks and rural commercial banks to go public, we can promote virtuous interaction between the capital market and the small and medium-sized banks, increase financial support for SMEs and mitigate risks for balanced development of banks. However, First and foremost, listed small and medium-sized commercial banks must put primary focus on serving SMEs and avoid blind expansion. Secondly, we should emphasize regulatory compliance, strengthen requirements for information disclosure, risk management and ethical operation. We must achieve win-win situation among SMEs, small and medium-sized financial institutions and the multi-tiered capital market.
The OTC Market enhances standard operation of SMEs
The National Equities Exchange and Quotations, or the national OTC Market, was established this year, symbolizing a giant step forward in constructing and perfecting a multi-tiered capital market. Evidence shows that identity shift from a private business owner to a public company leader in a short period of time can be very hard for entrepreneurs. That hardship has formed the most prominent challenge for the SME board and ChiNext Market. Before quoting on OTC market, SMEs should first accomplish restructuring and fulfill obligations of information disclosure. The national OTC Market builds a platform of visibility for SMEs and guides them to regulated and standard operation. We hope the OTC market will see a speedy development. We suggest that municipal commercial banks and rural commercial banks quote on the OTC market and local equity transfer centers to get used to capital markets and prepare for public listing in future.
Reinforcing capital market cooperation between the Mainland and Hong Kong
To further strengthen cooperation between capital markets of the Mainland and Hong Kong, it is recommended that the following liberalization measures be taken: First, we should continue to increase QFII and RQFII quotas and maintain a stable and efficient pace in foreign exchange quota approval. The overall asset allocation restrictions for RQFII should be further loosened and finally lifted. Second, based on Qianhai’s privilege to pilot within the framework of CEPA, we should advance QFII2(Qualified Foreign Individual Investors Scheme) and RQFII2 (Reminbi-demoninated Qualified Foreign Individual Investor Scheme) and allow Hong Kong and Macao residents working and living in the Mainland to invest in the A-share market under the premise of the suitability management. Pilot programs should also be conducted in QDII (Qualified Domestic Institutional Investors Scheme) to facilitate regular and convenient capital transactions for mainland residents. Third, we should support the development of cross-border ETF and cross-border bond market. We will strive to explore mutual recognition of funds registered in the Mainland and Hong Kong, cross-border sales of fund products, cross listing of exchange-traded products between Mainland and Hong Kong and allowing H-share companies listed in Hong Kong to issue A-shares and bonds in the Mainland.
